The Capital Market is the part of the financial system where long-term funds (with a maturity of more than one year) are raised by companies, governments, and other institutions. Its primary role is to channel savings from investors to those who need capital for long-term productive use, like building factories or infrastructure.
Segments of the Capital Market
The Capital Market is divided into two main parts:
1. Primary Market
This is where new securities are created and issued for the first time. When a company decides to raise funds by selling its shares to the public, it does so in the primary market.
- Also known as: The New Issues Market.
- Key Function: It facilitates capital formation in the economy.
- Example: An Initial Public Offering (IPO) is the most common example. When a company offers its shares to the public for the first time, it’s a primary market transaction.
2. Secondary Market
This is where previously issued securities are bought and sold among investors. The company whose shares are being traded is not directly involved in these transactions.
- Also known as: The Stock Market.
- Key Function: It provides liquidity, allowing investors to sell their securities and convert them into cash easily.
- Example: Any transaction of buying or selling shares of an already listed company like Reliance or Infosys on a stock exchange.
Stock Exchange
A Stock Exchange is an organized and regulated marketplace where the trading of securities like shares, bonds, and derivatives takes place. It is the physical and technological backbone of the secondary market.
Major Stock Exchanges in India
India has two major national stock exchanges:
- Bombay Stock Exchange (BSE):
- Established in 1875, it is Asia’s oldest stock exchange.
- Its benchmark index, which is a key indicator of market performance, is the S&P BSE Sensex. The Sensex tracks the performance of the 30 largest and most actively traded stocks.
- National Stock Exchange (NSE):
- Established in 1992, it was the first exchange in India to provide a fully automated, screen-based electronic trading system.
- It is the largest stock exchange in India by trading volume.
- Its benchmark index is the Nifty 50, which tracks the performance of 50 of the largest Indian companies.
The Regulator
The entire capital market, including the stock exchanges, is regulated by the Securities and Exchange Board of India (SEBI). SEBI’s role is to protect the interests of investors, regulate the market, and ensure its fair and orderly functioning.